Are Online Auction Markets Efficient? an Empirical Study of Market Liquidity and Abnormal Returns

Total Page:16

File Type:pdf, Size:1020Kb

Are Online Auction Markets Efficient? an Empirical Study of Market Liquidity and Abnormal Returns Archived version from NCDOCKS Institutional Repository – http://libres.uncg.edu/ir/asu/ Kauffman, R.J., Spaulding, T.J., and Wood, C.A. (2009) Are online markets efficient? An empirical study of market liquidity and abnormal returns. Decision Support Systems, 48(1): 3-13 (December 2009). Published by Elsevier (ISSN: 1873-5797). The version of record is available from: http://dx.doi.org/10.1016/j.dss.2009.05.009 Are online auction markets efficient? An empirical study of market liquidity and abnormal returns Robert J. Kauffman, Trent J. Spaulding, Charles A. Wood ABSTRACT Technological advances have facilitated investment in collectibles through online auction markets, where information regarding product characteristics, current and historical prices, and product availability is available to millions of market participants. However, market inefficiencies may still exist, where prices do not reflect market information and where savvy speculators can profit. Using unit root and variance ratio tests, we examine 8538 rare stamp and 56,997 rare coin auctions to evaluate the efficiency of online markets. In particular, we study market liquidity, abnormal returns and weak-form efficiency. We find an inverse relationship between market efficiency and liquidity. Bidder competition intrinsic to liquidity increases the chances that uninformed bidders drive up item prices, leading to the observed market inefficiencies. 1. INTRODUCTION It is common knowledge among investors that thin markets are less efficient than markets that have broader following and participation. Many housing markets, some stock markets, mortgage-backed securities markets, and collectible markets represent examples of thin markets, where purchase and sales transactions, trading, and exchange may be sporadic, and price discovery may be challenging. Together, nevertheless, they represent billions of dollars of exchange in market transactions. Increasingly, we are seeing relatively thin markets being impacted by the burgeoning technologies of the Internet, permitting such innovative approaches to transaction-making as electronic call auctions, reverse auctions, and numerous forms of digital intermediation. With so much price information available to bidders and sellers in online auctions, the question of market efficiency in these collectible markets presents itself. By market efficiency, we mean that the market price is based upon all information available in the market. From this perspective, weak-form efficiency in a market occurs where the price for every good on the market reflects all historical information, and is available to any market participant [13]. Market efficiency is different from operational efficiency in that it deals with equal access to information by all market participants. By contrast, operational efficiency deals with maximizing some aspect of the operation, with little concern about the transfer of information among all participants in the market. For example, Vragov [49] discusses how online auctions are operationally efficient in that they allow the seller to maximize common and private value surplus. Intermediaries utilize technology to bring together geographically-fragmented markets, as a way to improve financial efficiency and market quality. These markets exhibit the classical characteristics of thin markets. We investigate the efficiency and persistence of abnormal returns in collectible markets. Collectibles are often viewed as an investment alternative, which can be used for diversification or as a hedge against inflation (like gold bullion) with some rare coins even quadrupling in value after several years. Swiatek [47] discusses how rare coins can be appealing in a bear market, and Pesando [41], Mei and Moses [37], and Wood [50] compare collectible returns to stock market prices using financial economics theory, like the capital asset pricing model (CAPM). Ashenfelter and Graddy [4] also point out research that shows returns on collectible items can surpass returns from fixed income securities. Typically, auctions have not been viewed as very efficient markets, as an uninformed bidder could end up paying too much for an item or a seller could end up selling an item for a fraction of its worth [43] and [48]. Internet technologies, however, have increased the flow and availability of information in online auctions, allowing millions to interact, and promoting participation across the globe. This technological transformation has made auctions into a type of exchange, akin to a stock or commodities exchange. Indeed, the volume of transactions in online auctions now surpasses the volume of stocks that are bought and sold in many countries. With many more items for sale, and many more bidders bidding, online auctions allow collectibles as investments to take on a new practicality, making investments in collectibles bought and sold in online auctions more feasible for the typical investor. Through this lens, we investigate how efficiency has adjusted with market liquidity, as more buyers and sellers have entered the online auction market and the ratio of buyers to sellers has changed. Abnormal returns occur when price levels differ from expected or previous sale prices, resulting in high or low returns for an investor. They occur due to new information in the market. Abnormal returns in an efficient market are persistent, indicating that other investors share a new common valuation, whereas an inefficient market with low levels of persistent returns indicates that abnormal returns are ignored. Then prices revert back to the mean price after the abnormal return occurs. We do not deny that under-informed bidders may make bids that may be too high, yet the existence of high bids is likely to inflate the price that rational and informed investors will be wiling to pay for an asset. In efficient markets, abnormal returns reflect new information, so that abnormal returns in one period carry forward to future prices. In inefficient markets, the effect of abnormal returns are often minimized or eliminated, as prices revert to a mean price. With this in mind, we will not claim that online auctions, in their current form at least, can ever be viewed as completely efficient markets. We will explore the persistence of abnormal returns to determine how much current returns seem to affect the level of future returns. We will check if future returns are unpredictable, as they would be in an efficient market. We ask: Are online auction markets, such as those for rare coins and rare stamp markets, efficient? What factors might affect the persistence of abnormal returns in online auctions? How can we measure the efficiency and persistence of abnormal returns on assets traded in online markets? Can we implement a research design to assess the efficiency and persistence of abnormal returns in online auctions for collectible coins and stamps? How does the amount of trading activity play a role? There are major differences between a stock market, where market efficiency is typically studied, and an online auction market. The first difference deals with short selling, where investors can take advantage of an overpriced stock by selling the stock now and agreeing to buy it later. There is no way to easily mimic short selling in online auction markets, thus allowing inflated prices to persist. A collectibles investor is able to place an item for sale, and then purchase it in the same market later, but the immediacy of the stock market is not present. The second difference deals with the effects of individual bidders. Unlike the stock market, two bidders can drive a price above the normal valuation for an item. (This is a basis for winner's curse in online auctions.) These two factors can introduce inflated prices for an item, as two or more bidders bid up its price, resulting in high prices that may persist for the sale of the item in the future. Far from making inefficiency irrelevant though, the differences between online auction markets and stock markets make studying efficiency imperative for investors. Online auctions have challenges that stock markets do not. Since investors make money by taking advantage of inefficiencies, these inefficiencies can make online auctions potentially more profitable than stock market investments. We will expose inefficiencies that may exist in online auction collectible markets for the investor to exploit. To do this, we provide a measure of weak-form efficiency in online auctions for collectibles, and confirm a relationship between market efficiency and market liquidity in the rare coin and rare stamp markets. Thus, increases in market liquidity (marked by an increase in bidder competition) lead to decreases in online auction market efficiency. The theoretical intuition that drives this finding is that, with stock markets, increase in the number of investors would indeed lead to greater efficiency as more investors search to profit from inefficiencies. By contrast, in online auctions, high liquidity involves many bidders competing for the same item. It increases the likelihood that uninformed collectors drive up collectibles prices. We draw upon theory in financial economics for this work. IS researchers are often concerned with how information is transferred among participants in online systems, and the effects this information has on system users. This becomes especially interesting when the system is a market, and the market is created with the new technologies of the Internet. We leverage the theory of market efficiency
Recommended publications
  • Internet Auctions and Virtual Malls
    Internet Auctions and Virtual Malls Is this Booklet Right for You? If you are a small business owner looking for alternatives to creating your own e-commerce website and want to sell online, then you will find this booklet useful. Even if you already have your own website, you can use this booklet to learn more about where you can sell (or buy) products and services online (e.g. Internet Auctions). You can also consider virtual malls or e-mall services where your site is listed along with others. E-malls are discussed later in this booklet. What is an Internet Auction? Internet auctions bring people and/or businesses together on Examples of Auction Websites one website to buy and sell • www.uBid.com (general auction site). products and services. Buying and selling processes vary • www.eBay.com (general auction site). across auction sites; so make • www.alibaba.com (general auction site). sure you familiarize yourself with these techniques by • www.bidville.com (general auction site). visiting these websites. • www.liquidation.com (commercial surplus inventory and government surplus assets – a wide variety of product categories). Most auction sites act as hosts for other businesses or individuals. • www.dovebid.com (global provider of capital asset auction, Generally the host of the website valuation, redeployment, and management services). organizes the site, provides • www.elance.com (focuses on services. You can search for a service product information, displays provider by category or post your project and receive proposals the product and processes from service providers). payments online. A fee is charged Sources: Index of the web.com www.indexoftheweb.com/Shopping/Auctions.htm to list the product or service and/ www.emarketservices.com, http://www.e-bc.ca/pages/resources/internet-auctions.php or a commission is taken on each completed sale.
    [Show full text]
  • Annual Registration Fee $100
    Auction Terms and Conditions Welcome to Capital City Auto Auction As a “Buyer” with Capital City Auto Auction (CCAA) you agree to be bound by the following Auction Terms and Conditions. CCAA may amend these terms and conditions at any time, without prior notice. Online Account: CCAA operates as an online auction. All searches, bidding and sale communications are made electro nically via the internet. Buyers must have computer access, an active email address, and register online at CapitalCityAutoAuction.Com with a unique username and password. Most items (Vehicle) at CCAA are donations, and are being sold by a charitable organization. CCAA has NO information regarding the condition or history of any Vehicle. NO physical or mechanical inspections have been performed by CCAA. Vehicles are NOT test driven; CCAA cannot verify drivability or attest to the condition, or soundness of the Vehicle, including but not limited to, the Powertrain, Drivetrain, Suspension, or Electrical Systems. CCAA provides a general description of each Vehicle; however, mechanical problems may be present which are not apparent, visible, or known by CCAA. CCAA is not responsible for the accuracy or incomplete descriptions of Vehicles. Conditions of Sale: All Vehicles sold at CCAA are sold "As-Is, Where-Is, With All Faults", With No Warranty, Expressed or Implied, Including But Not Limited To, Any Warranty of Fitness or Merchantability. Any and all information provided by CCAA in writing, verbally, or in image form pertaining to any auction item, including (when available) the Vehicle Identification Number and License Plate Number, is solely for the Buyer’s convenience.
    [Show full text]
  • Bidding Agents in Online Auctions: What Are They Doing for the Principal? Gilbert Karuga University of Kansas
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by AIS Electronic Library (AISeL) Association for Information Systems AIS Electronic Library (AISeL) Americas Conference on Information Systems AMCIS 2004 Proceedings (AMCIS) December 2004 Bidding Agents in Online Auctions: What are they doing for the principal? Gilbert Karuga University of Kansas Sasidhar Maganti University of Kansas Follow this and additional works at: http://aisel.aisnet.org/amcis2004 Recommended Citation Karuga, Gilbert and Maganti, Sasidhar, "Bidding Agents in Online Auctions: What are they doing for the principal?" (2004). AMCIS 2004 Proceedings. 213. http://aisel.aisnet.org/amcis2004/213 This material is brought to you by the Americas Conference on Information Systems (AMCIS) at AIS Electronic Library (AISeL). It has been accepted for inclusion in AMCIS 2004 Proceedings by an authorized administrator of AIS Electronic Library (AISeL). For more information, please contact [email protected]. Karuga et al. Bidding Agents in Online Auctions Bidding Agents in Online Auctions: What are they doing for the principal? Gilbert Karuga Sasidhar Maganti Accounting and Information System Accounting and Information System School of Business School of Business University of Kansas University of Kansas [email protected] [email protected] ABSTRACT Online auctions were the most notable survivors of the ‘Internet Bubble Burst’ phenomenon that hit e-commerce related businesses at the turn of the millennium. With most online auctions lasting between 1 and 9 days, not all bidders have the time to monitor the progress of an auction for such long periods. In addition, many bidders in online auctions are new to the bidding game, leaving them at a disadvantage in the bidding process.
    [Show full text]
  • Online Marketplaces
    1 Online Marketplaces CONTENTS 1.1 What is an Online Marketplace? ..................... 4 1.2 Market Services .............................. 5 1.2.1 Discovery Services . 5 1.2.2 Transaction Services . 6 1.3 Auctions . ................................ 7 1.3.1 Auction Types . 7 1.3.2 Auction Configuration and Market Design . 8 1.3.3 Complex Auctions . 11 1.4 Establishing a Marketplace ........................ 12 1.4.1 Technical Issues . 12 1.4.2 Achieving Critical Mass . 13 1.5 The Future of Online Marketplaces . ................. 14 Even before the advent of the world-wide web, it was widely recognized that emerging global communication networks offered the potential to revolutionize trading and commerce [Schmid, 1993]. The web explosion of the late 1990s was thus accompanied immediately by a frenzy of effort attempting to translate existing markets and introduce new ones to the Internet medium. Al- though many of these early marketplaces did not survive, quite a few important ones did, and there are many examples where the Internet has enabled fundamental change in the conduct of trade. Although we are still in early days, automating commerce via online markets has in many sectors already led to dramatic efficiency gains through reduction of transaction costs, improved matching of buyers and sellers, and broadening the scope of trading relationships. Of course, we could not hope to cover in this space the full range of interesting ways in which the Internet contributes to the automation of market activities. Instead, this chapter addresses a particular slice of electronic commerce, in which the Internet provides a new medium for market- places.
    [Show full text]
  • Online Auctions
    Online Auctions Thinking of bidding in an online auction or selling some of your stuff? Internet auctions are a great resource for shoppers and sellers, but you need to watch out for some pitfalls. Learn how the site works Usually, a site has rules for both buyers and sellers. Before you bid, get to know how the site works, and its rules and policies for buyers and sellers. Look for information about: Make sure the pages where you register, sign in and pay are secure. Payment Contact the government agency being represented to Can you pay with safer payment methods, like credit make sure the auction is legitimate. cards, that come with fraud protection? Can you use a secure online payment system that links to your credit WisconsinSurplus.com or debit card and hides your account number when you WisconsinSurplus.com is a contracted vendor for the pay? As a seller, when will you receive payment? State of Wisconsin to provide the state with their required on-line auction needs. All items listed for bids Privacy and security and/or sale on this site are items considered surplus How will the site protect and use your personal and/or excess to the on-going daily needs of the various information, if you register as a buyer or seller? Make State of Wisconsin departments and agencies. For more sure the pages where you register, sign in and pay are information contact Wisconsin Surplus at (608) 437- secure. If the URL on a page begins with “https”, the 2001 or by email at [email protected].
    [Show full text]
  • Auction Policies
    AUCTION POLICIES Effective September 8, 2019 Auction Policies v.7 Effective September 8, 2019 Welcome to ADESA! Our goal is to provide you with a quick, efficient and trustworthy used vehicle marketplace that delivers results. We have therefore developed these Policies to assist our Customers to understand their rights and obligations to each other and to the Auction. Through these Policies, we create an environment where Sellers can be confident they will be paid true market value for the Vehicles they sell and Buyers can be confident about the quality and condition of the Vehicles they buy. Our Core Values Integrity Employee welfare Customer care Safety Profitability Community involvement Teamwork Fun Page 2 of 24 Auction Policies v.7 Effective September 8, 2019 TABLE OF CONTENTS Page GENERAL TERMS AND CONDITIONS ............................................................................................... 6 1. Application .......................................................................................................................................................................................................... 6 2. Notice of Changes ............................................................................................................................................................................................... 6 3. Definitions ..........................................................................................................................................................................................................
    [Show full text]
  • Online Auction Markets
    Online Auction Markets by Song Yao Department of Business Administration Duke University Date: Approved: Carl Mela, Chair Han Hong Wagner Kamakura Andr´esMusalem Dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Business Administration in the Graduate School of Duke University 2009 Abstract (Business Administration) Online Auction Markets by Song Yao Department of Business Administration Duke University Date: Approved: Carl Mela, Chair Han Hong Wagner Kamakura Andr´esMusalem An abstract of a dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Business Administration in the Graduate School of Duke University 2009 Copyright c 2009 by Song Yao All rights reserved except the rights granted by the Creative Commons Attribution-Noncommercial Licence Abstract Central to the explosive growth of the Internet has been the desire of dispersed buy- ers and sellers to interact readily and in a manner hitherto impossible. Underpinning these interactions, auction pricing mechanisms have enabled Internet transactions in novel ways. Despite this massive growth and new medium, empirical work in mar- keting and economics on auction use in Internet contexts remains relatively nascent. Accordingly, this dissertation investigates the role of online auctions; it is composed of three essays. The first essay, “Online Auction Demand,” investigates seller and buyer interac- tions via online auction websites, such as eBay. Such auction sites are among the earliest prominent transaction sites on the Internet (eBay started in 1995, the same year Internet Explorer was released) and helped pave the way for e-commerce.
    [Show full text]
  • Trust and Experience in Online Auctions
    Marquette University e-Publications@Marquette Management Faculty Research and Publications Management, Department of 2018 Trust and Experience in Online Auctions Terence T. Ow Brian I. Spaid Charles A. Wood Sulin Ba Follow this and additional works at: https://epublications.marquette.edu/mgmt_fac Part of the Business Commons Marquette University e-Publications@Marquette Management Faculty Research and Publications/College of Business Administration This paper is NOT THE PUBLISHED VERSION; but the author’s final, peer-reviewed manuscript. The published version may be accessed by following the link in the citation below. Journal of Organizational Computing and Electronic Commerce, Vol. 28, No. 4 (2018) : 294-314. DOI. This article is © Taylor & Francis and permission has been granted for this version to appear in e- Publications@Marquette. Taylor & Francis does not grant permission for this article to be further copied/distributed or hosted elsewhere without the express permission from Taylor & Francis. Trust and Experience in Online Auctions Terence T. Ow Department of Management, College of Business Administration, Marquette University, Milwaukee, WI Brian I. Spaid Department of Marketing, College of Business Administration, Marquette University, Milwaukee, WI Charles A. Wood: ShiftSecure, Philadelphia, PA Sulin Ba Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, CT Abstract: This paper aims to shed light on the complexities and difficulties in predicting the effects of trust and the experience of online auction participants on bid levels in online auctions. To provide some insights into learning by bidders, a field study was conducted first to examine auction and bidder characteristics from eBay auctions of rare coins.
    [Show full text]
  • Online Reverse Auctions: an Overview
    Journal of International Technology and Information Management Volume 13 Issue 4 Article 5 2004 Online Reverse Auctions: An Overview Ching-Chung Kuo University of North Texas Pamela Rogers University of North Texas Richard E. White University of North Texas Follow this and additional works at: https://scholarworks.lib.csusb.edu/jitim Part of the Business Intelligence Commons, E-Commerce Commons, Management Information Systems Commons, Management Sciences and Quantitative Methods Commons, Operational Research Commons, and the Technology and Innovation Commons Recommended Citation Kuo, Ching-Chung; Rogers, Pamela; and White, Richard E. (2004) "Online Reverse Auctions: An Overview," Journal of International Technology and Information Management: Vol. 13 : Iss. 4 , Article 5. Available at: https://scholarworks.lib.csusb.edu/jitim/vol13/iss4/5 This Article is brought to you for free and open access by CSUSB ScholarWorks. It has been accepted for inclusion in Journal of International Technology and Information Management by an authorized editor of CSUSB ScholarWorks. For more information, please contact [email protected]. Online Reverse Auctions: An Overview Journal of International Technology and Information Management Online Reverse Auctions: An Overview Ching-Chung Kuo Pamela Rogers Richard E. White University of North Texas ABSTRACT Electronic commerce (e-commerce) is the fastest growing area in the U.S. economy with electronic procurement (e-procurement) being a major component, and online reverse auctions (ORAs) have emerged as a key e-procurement tool. Since the mid-1990s, ORAs have been gaining in popularity because of their potentially significant positive impact on the profitability of both the buyers and the sellers. Much has been written about the new purchasing paradigm and numerous stories have been reported recently.
    [Show full text]
  • City Research Online
    Mocanu, D., Baronchelli, A., Perra, N., Gonçalves, B., Zhang, Q. C. & Vespignani, A. (2013). The Twitter of Babel: Mapping World Languages through Microblogging Platforms. PLoS ONE, 8(4), doi: 10.1371/journal.pone.0061981 City Research Online Original citation: Mocanu, D., Baronchelli, A., Perra, N., Gonçalves, B., Zhang, Q. C. & Vespignani, A. (2013). The Twitter of Babel: Mapping World Languages through Microblogging Platforms. PLoS ONE, 8(4), doi: 10.1371/journal.pone.0061981 Permanent City Research Online URL: http://openaccess.city.ac.uk/2678/ Copyright & reuse City University London has developed City Research Online so that its users may access the research outputs of City University London's staff. Copyright © and Moral Rights for this paper are retained by the individual author(s) and/ or other copyright holders. All material in City Research Online is checked for eligibility for copyright before being made available in the live archive. URLs from City Research Online may be freely distributed and linked to from other web pages. Versions of research The version in City Research Online may differ from the final published version. Users are advised to check the Permanent City Research Online URL above for the status of the paper. Enquiries If you have any enquiries about any aspect of City Research Online, or if you wish to make contact with the author(s) of this paper, please email the team at [email protected]. Rationality, irrationality and escalating behavior in lowest unique bid auctions Filippo Radicchi,1, 2, 3 Andrea Baronchelli,4 and Luís A. N. Amaral1, 2, 5 1Howard Hughes Medical Institute (HHMI), Northwestern University, Evanston, Illinois 60208 USA 2Department of Chemical and Biological Engineering, Northwestern University, Evanston, Illinois 60208 USA 3Departament d’Enginyeria Quimica, Universitat Rovira i Virgili, Av.
    [Show full text]
  • Physical Vs. Electronic Auction Environments: What Do Dealers Think?
    Physical vs. Electronic Auction Environments: What Do Dealers Think? A research report written by: Eric Overby Goizueta Business School - Emory University April 2007 This research project was sponsored by the National Auto Auction Association. Special thanks to Tom Caruso, Gregg Kobel, and Frank Hackett for sponsoring the project, and to Don Elliott, Steve Greenfield, and Lynn Weaver for serving on the project’s steering committee. If you have questions or comments about the study, please contact Eric Overby. Eric’s e-mail address until July 15, 2007 is [email protected]. After July 15, 2007, it will be [email protected]. Table of Contents Executive Summary.................................................................................................................. 5 Introduction............................................................................................................................... 7 Theories Proposed to Explain Dealer Preference for Physical or Electronic Auctions............ 9 Theories Favoring the Physical Auction............................................................................. 11 Theories Favoring Electronic Auctions .............................................................................. 17 Methodology Used to Conduct the Study............................................................................... 19 Sample Demographics ........................................................................................................ 20 Summary of the Overall Findings..........................................................................................
    [Show full text]
  • Online Auctions: a Survey of the Empirical Research
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics NBER WORKING PAPER SERIES ECONOMIC INSIGHTS FROM INTERNET AUCTIONS: A SURVEY Patrick Bajari Ali Hortacsu Working Paper 10076 http://www.nber.org/papers/w10076 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 November 2003 The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ©2003 by Patrick Bajari and Ali Hortacsu. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Economic Insights from Internet Auctions: A Survey Patrick Bajari and Ali Hortacsu NBER Working Paper No. 10076 November 2003 JEL No. L1, D8 ABSTRACT This paper surveys recent studies of Internet auctions. Four main areas of research are summarized. First, economists have documented strategic bidding in these markets and attempted to understand why sniping, or bidding at the last second, occurs. Second, some researchers have measured distortions from asymmetric information due, for instance, to the winner's curse. Third, we explore research about the role of reputation in online auctions. Finally, we discuss what Internet auctions have to teach us about auction design. Patrick Bajari Department of Economics Duke University 219B Social Science Building Durham, NC 27708-0097 and NBER [email protected] Ali Hortacsu Department of Economics University of Chicago 1126 East 59th Street Chicago, IL 60637 and NBER [email protected] Economic Insights from Internet Auctions: A Survey.
    [Show full text]